Following a plea for assistance from governor Ricardo Rosselló Nevares, the Oversight Board (OB) yesterday filed with the federal district court of Puerto Rico a petition under Tittle III of PROMESA in hopes of staving off 22 suits against the Government and engaging in negotiations with bondholders that would put an end to a decade of fiscal hardship and economic contraction.
Yesterday, at about 11:32 a.m., the general legal adviser of the OB, Jaime El Khoury, filed the petition which made Puerto Rico the first state and territorial jurisdiction in the history of the United States to go before a court to renegotiate the debt issued by the highest level of government, a power unavailable to other states and which not even other territories had until the introduction of PROMESA.
The petition before the federal court had the effect of triggering the automatic freeze on litigations that protected the Island against suits from creditors until last May 1. The petition which will have to be ratified by a judge, was filed some 36 hours after the expiration of the so-called “stay,” which opened the door for the Government or its public corporations to be hit with five suits of the twenty the Island faces. Three of these suits were filed by municipal insurer Ambac Assurance Corp.
According to the governor of Puerto Rico, his administration had no other option but to petition for the application of Tittle III, because the creditors with whom his fiscal team was still negotiating decided to sue the Island to collect their money.
“We have reached this decision because we understand it to be the way to defend the best interest of the Puerto Rican people,” said the governor, indicating they tried nicely to convince creditors to accept a cut.
Yesterday, Rosselló Nevares and Puerto Rico’s representative to the OB, Elías Sánchez Sifonte, during a press conference at La Fortaleza, were quick to say that the government petition for bankruptcy came as a result of actions by those in previous administrations who also repeated the words of former governor Alejandro García Padilla, who in the twilight of his administration assured that services for people went before bondholders.
Likewise, Rosselló explained why he ended up invoking bankruptcy seeing that he spent two years in the campaign trail assuring that bondholders could be paid.
Rosselló Nevares said that, instead of the $3 billion deficit he anticipated, they found a shortage of $7.5 billion.
“What does this change mean? It means a dramatic change,” Rosselló Nevares said.
Whether or not the fiscal chaos was inherited, because the party represented by Rosselló Nevares has governed the Island for almost as long as the Popular Democratic Party, the petition filed by the OB came with the unanimous backing from the members of that body along with a 23 page declaration detailing that the crisis being experienced by Puerto Rico will grow “exponentially” given the lack of cash flow and the end of federal health funds.
“Out of the current revenues, the Government and its units can’t satisfy their collective debt burden of $74 billion and the $49 billion burden in pensions and (still) pay for its operating expenses,” reads the declaration by the OB, recalling that the Island’s three main pension plans will run out of money starting in December of this year.
Cofina and others next. According to the OB, the financial picture leaves no other option than Tittle III to try and negotiate some $49 billion of the Island’s public debt, using the Fiscal Plan for Puerto Rico as its roadmap.
The issue is so serious that yesterday, from Washington, in a forum sponsored by the American Enterprise Institute, OB president, José Carrión, asserted that the federal entity has taken “this action solely to fulfill its purpose, according to that established by PROMESA, to provide a method so the government of Puerto Rico and its instrumentalities may attain fiscal responsibility and (gain) access to capital markets”.
Immediately thereafter, Carrión said that, although not every corporation will use Tittle III, that will be the case for Puerto Rico Sales Tax Financing Corporation (Cofina).
The circumstances Puerto Rico finds itself in now entail a course of action so complex that yesterday, former Treasury adviser, Antonio Weiss, during the same forum, described the phase that is now beginning as “a long spell.”
“That stay on litigations has already made it possible to suspend $2 billion in debt payments,” Weiss said while adding that, without the reactivation of the “stay,” basic services of the government of Puerto Rico would be jeopardized.
Before, it was the bondholders, now its everyone. However, to avoid a disruption in public services by invoking Tittle III, the sought after cut will now become an adjustment of accounts for the bondholders, but for people as well.
“Tittle III must matter to all, because now everything is really on the table,” said economist Antonio Fernós Sagebién.
According to Fernós Sagebién, along with the cuts to bonds, there’s also the Treasury refunds, adjudications against the state, and the accounts receivables from any vendor or contractor.
The end of myths. The list made public by the OB with the first 20 creditors of Puerto Rico evidence that the adjustment will affect (everyone) from the companies that print the books for the Department of Education, to the non-profit organizations which struggle to rescue school dropouts, and insurers and pharmacies holding contracts with MiSalud. Bondholders and that small group of vendors alone are owed $12.3 billion.
Fernós Sagebién said that it will now be up to the judge to decide what neither the OB, nor the administration of Alejandro García Padilla of that of Rosselló Nevares managed to do: determine what constitutes an essential service.
And in that sense, Fernós Sagebién said that Puerto Rico has lost one year and paid millions in consultants (fees) to end up in the hands of judges.
“The problem with that is how many local contractors, who move money in the economy every day, will be affected according to the terms of Tittle III,” said, for his part, attorney Iván Rivera.
To the extend that these claims are affected, any economic growth forecast prepared by the Government will end up turning into salt and water. “That could end up cancelling the forecasts contained in the same plan, and moneys that could have been reinvested somehow back into the economy, will no longer be there,” Rivera said.
“Pensions will be a central issue,” added the spokesperson for the organization Transparency in Government Finances.
Although pensions wouldn’t necessary be modified, retirees would not be able escape other adjustments such as the loss of the contribution to the health plan, for instance.
“We are no longer talking about reaching agreements with bondholders. Now, if you leave essential services in the hands of a judge, who will be appointed by the Chief Justice of the Supreme Court, there will be more decisions in an Excel spreadsheet than those based on the sensibility afforded by the government administration,” said Rivera while indicating that, in the aggregate, Puerto Rico could stand to loose more through Tittle III than previously thought.
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